The long-term trend up has been going on for a long time now. We do have some signs that this current cycle may be ending, and we may need to get out soon. Soon does not mean now.
After a rather unusual session on Wednesday, where the stock market was presented with a very market friendly report from the Fed and immediately took a pretty big dive, we returned to more normalcy on Thursday.
While it was speculated that some investors may be concerned that there was some information that the Fed knew and wasn’t sharing it with us, because they couldn’t quite understand why the Fed seemed to roll over this easy, the Fed’s position does make a lot of sense just looking at what we know.
The Fed is known to jump in and put the brakes on too soon at times, in the opinion of some at least, and the lack of real movement in the stock market last year is blamed at least in part by the Fed slowing down the economy with interest rate hikes at a time where they may have done too much.
In retrospect, this does look plausible. After a year where the U.S. grew GDP by 2.9%, and this year starting out with the projection of this slowing down, if they indeed thought 2.9% was too much, the invisible hand was working on this side to put a lid on this without any intervention.
This was the reason why the Fed shared with us that they were going to be patient as far as more increases are concerned during the December meeting. Their predictions for 2019 then dropped, where they are now expecting a growth rate this year of only 2.1%. If they wanted this to drop, it has already happened.
This is a move and an area which we would expect the Fed to be quite comfortable with, and not raise rates to push this further down, especially when it is in a downward trend like we see now. Coming to this decision involved no need for sleight of hand or acting upon some sort of secret knowledge.
The Reasons Behind the Fed’s Current View are Quite Transparent
Therefore, we should be left with a view by the market that, while this news was all expected, having it confirmed for sure does add to the perceived outlook by adding more certainty to these beliefs. That usually results in a little boost at least to the effect that this positive outlook has already provided.
This not at all what we saw Wednesday, and while the selloff that this news provoked wasn’t all that impactful, it was of a sufficient magnitude to deliver a message, and that message was that this was news that the market voted against, at least on that day.
That was the view Wednesday, and we ended up learning on Thursday that this move may have been more influenced by simple profit taking than we realized, and clients have been told that this would be a good time to get off the bull.
For instance, Guggenheim Partners’ chief investment officer, Scott Minerd, advised that “it’s not a bad time to take profits.” He justifies this by pointing out that “it is late in the cycle, and a recession looms out there, and we can all argue about when, but it’s coming.”
It may or may not come, in addition to when it may, but we do know that it isn’t here yet, and may not come for a while. It isn’t clear why it would make sense to act now rather than wait to see when it does come.
We can assess things negatively overall when it comes to the medium or long-term, for instance the fact that it is more likely than not that the market will be lower a year from now. This isn’t clear at all, but if this were true, we may wonder why we would ever want to essentially stay in a bet where the odds over these periods are not in our favor.
We do know that selling Wednesday into this news wasn’t a good move, because the markets went higher Thursday, and well above even the highest level of Wednesday. We might just want to ignore the day-to-day trading and the shorter-term moves and just focus on these medium to long-term viewpoints, but that actually doesn’t make much sense.
It Makes Sense to See Something Happen Before Steering Clear of It
If we are worried about an event, and it has not happened yet, we need to examine these worries closely, to determine whether they are justified on a shorter time-frame. Even if we know the market will be taking a hit for sure, which we never really do know with that sort of certainty, we are still wise to actually wait for the event to unfold and not just toss our cards in the middle of the table when there is no good reason to and the hand actually looks pretty playable right now.
Any advice to sell into an upward moving trend is of this nature. While big institutional investors do need to be pre-emptive with their strikes, giving up upside by exiting into strength, this is because once they start selling, it takes so long to close their positions that they can suffer a whole lot of slippage, where their average price is considerably lower than when the selling got underway sufficiently to make the call.
These advises therefore need to be prefaced this way, in other words telling us that this is the point where large investors may want to jump off, but knowing this still isn’t a reason to join them. It is smarter to wait until this selling pressure builds enough to cause what we are looking to prevent, which is a downswing in the price of our stocks.
All we can rightly tell investors here, without encouraging them to exit too soon, is that the cycle may end soon and to be ready when it does if you are looking to get out and get the jump on may end up to be a bear market of some significance. Most investors don’t even time their investments though, so none of this will probably matter to them anyway.
We need to be careful not to mix timeframes like this, looking to judge short-term positions by using longer-term expectations. This is something that the investment industry does all the time though, and we need to examine the reasoning behind it more carefully than just swallowing it whole without any deliberation.
When we are invested in a certain timeframe, we are also invested in shorter ones, as this is a requirement. We might even be very long-term investors, but when the time comes where we are considering cashing in, doing so at the right time, with a view toward where the right time to get off might be, cannot be made irrelevant.
We’re still in the so far so good stage, and the Fed being so nice is plenty nice indeed. We also do not want to forget that the Fed has rate cuts at its disposal should they be needed, and they aren’t afraid to use them either.
This does need to be decided in battle, with the Fed versus the economic slowdown, and we at least need to get a good idea of who is going to win before we just give up on our positions. The time to sell is coming, so it’s time to sell now, just isn’t logical.